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Even at the morning-after valuations of March and April 2001, the people at Yahoo had managed to create a company worth about billion in just six years.The fact is, despite all the nonsense we heard during the Bubble about the "new economy," there was a core of truth.But markets are good at solving that kind of problem.
Since the Internet was the big new thing, investors supposed that the more Internettish the company, the better. It was not the railroads themselves that made the most money during the railroad boom, but the companies on either side, like Carnegie's steelworks, which made the rails, and Standard Oil, which used railroads to get oil to the East Coast, where it could be shipped to Europe.
I think the Internet will have great effects, and that what we've seen so far is nothing compared to what's coming.
And as soon as these startups got the money, what did they do with it?
Buy millions of dollars worth of advertising on Yahoo to promote their brand.
Over the long term, what the Bubble got right will be more important than what it got wrong.1.
Retail VCAfter the excesses of the Bubble, it's now considered dubious to take companies public before they have earnings.The tiny, expensive pipeline to consumers was tellingly named "the channel." Control the channel and you could feed them what you wanted, on your terms.And it was not just big corporations that depended on this principle. It's very easy for people to switch to a new search engine.What made it not a Ponzi scheme was that it was unintentional. The venture capital business is pretty incestuous, and there were presumably people in a position, if not to create this situation, to realize what was happening and to milk it. Starting in January 2000, Yahoo's stock price began to crash, ultimately losing 95% of its value.Notice, though, that even with all the fat trimmed off its market cap, Yahoo was still worth a lot.Investors looked at Yahoo's earnings and said to themselves, here is proof that Internet companies can make money.So they invested in new startups that promised to be the next Yahoo.By the end of the Bubble, companies going public with no earnings were being derided as "concept stocks," as if it were inherently stupid to invest in them.But investing in concepts isn't stupid; it's what VCs do, and the best of them are far from stupid.Result: a capital investment in a startup this quarter shows up as Yahoo earnings next quarter—stimulating another round of investments in startups.As in a Ponzi scheme, what seemed to be the returns of this system were simply the latest round of investments in it.